Last week, the U.S. Court of Appeals for the D.C. Circuit issued its much-anticipated decision in PHH Corp. v. CFPB, No. 15-1177 (D.C. Cir., Oct. 11, 2016). In its 110-page decision, the three-judge panel deemed the Consumer Financial Protection Bureau (CFPB) “unconstitutionally structured” and overturned the bureau’s enforcement action, including a $109 million penalty against PHH Corp. (PHH), a large, New Jersey-based mortgage lender.1 Despite its rulings, the D.C. Circuit made clear that the CFPB will continue to operate and perform its duties.
In 2014, the CFPB initiated an administrative enforcement action against PHH for alleged violations of Real Estate Settlement Procedures Act (RESPA) § 8(a)’s ban on certain unearned referral fees. In its notice of enforcement action, the CFPB alleged the following:
PHH violated section 8(a) of RESPA when it referred business to mortgage insurers that had entered into captive reinsurance agreements; that the reinsurance payments received by PHH from mortgage insurers were a “thing of value,” consideration for PHH’s referrals, accepted by PHH, and either not for services actually performed or grossly exceeded the value of the reinsurance services [PHH’s subsidiary] provided; and that PHH violated section 8(b) of RESPA because the amounts that were ceded to [PHH’s subsidiary] constituted a split of mortgage insurance premiums paid by the borrowers.2
In contesting the allegations, PHH put forth two main arguments: (i) as supported by a 1997 interpretative letter from the Department of Housing and Urban Development (HUD) (1997 HUD Letter), RESPA § 8(c)(2) carves out a series of expansive exceptions, qualifications and safe harbors to the prohibitions under § 8(a); and (ii) RESPA’s three-year statute of limitations applied to administrative enforcement actions, such as the one brought against it by the CFPB.
After an extensive trial, an administrative law judge ruled against PHH, holding that RESPA’s statute of limitations did not apply to administrative enforcement actions, and recommending the disgorgement of more than $6.44 million in fees.3 Both parties appealed this decision to CFPB Director Richard Cordray.
On June 4, 2015, Director Cordray ultimately ruled that neither RESPA § 8(c)(2) nor the 1997 HUD Letter exempted PHH’s violations of § 8(a). Director Cordray also determined that no statute of limitations applies when the Bureau challenges a RESPA violation in an administrative proceeding. As a result, Director Cordray issued a final order requiring PHH to disgorge $109 million.4
PHH subsequently petitioned the D.C. Circuit for review. In challenging the CFPB’s enforcement order, PHH made both constitutional and statutory arguments.
The D.C. Circuit’s Ruling
Constitutionality of the CFPB’s Structure
After the D.C. Circuit panel hearing the case raised sua sponte constitutional concerns about the CFPB’s structure, PHH argued that the CFPB’s status as an independent agency headed by a single director violates Article II of the U.S. Constitution. According to PHH, to comply with Article II, either (i) the agency’s director must be removable at will by the President (i.e., a traditional executive agency); or (ii) if structured as an independent agency, the agency must be structured as a multi-member commission.5
To analyze this issue, the panel employed a “history-focused approach” and reviewed separation of powers decisions by the Supreme Court. The Court determined that the CFPB’s single-director structure represents a “gross departure” from settled historical practice. The D.C. Circuit observed that “[t]he CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.”6 The Court added that the CFPB’s structure lacks critical checks and constitutional protections, despite the agency wielding vast power over the U.S. economy.7
In outlining a remedy for these constitutional defects, the D.C. Circuit rejected calls to shut down the CFPB or invalidate the entire Dodd-Frank Act. Instead, the Court voided the unconstitutional for-cause removal provision, granting the President power to remove the CFPB director at will and to supervise and direct the director.8
Given that the CFPB will continue operating despite its “unconstitutional structure,” the D.C. Circuit also addressed PHH’s three statutory arguments in overturning the penalty.
First, the panel had to decide whether the CFPB correctly interpreted RESPA § 8. PHH argued that the CFPB misinterpreted RESPA § 8 to bar captive reinsurance arrangements involving mortgage lenders and their affiliated reinsurers. In agreeing with HUD’s longstanding interpretation, the Court ruled that RESPA § 8 allows captive reinsurance arrangements as long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance.9 Thus, as noted by the Court, the CFPB’s interpretation here “flouts not only the text of the statute but also decades of carefully and repeatedly considered official government interpretations.”10
Second, the Court examined whether the CFPB’s RESPA interpretation was applied retroactively, thereby violating PHH’s due process rights. PHH claimed the CFPB departed from HUD’s consistent prior interpretations of RESPA, including the 1997 HUD Letter, and then retroactively applied its new interpretation of RESPA against PHH. The Court agreed that the CFPB’s order and retroactive application here “violated bedrock principles of due process.” As explained by the Court, “[a]gency change is not a fatal flaw in and of itself, so long as the change is reasonably explained and so long as the new interpretation is consistent with the statute.”11 The “fatal flaw” here was that the CFPB retroactively applied its new interpretation to PHH’s conduct that occurred before the CFPB’s new interpretation was issued.12
Last, the panel had to determine whether a statute of limitations applied to its case against PHH. PHH contended that much of its alleged misconduct occurred outside of RESPA’s three-year statute of limitations. In rejecting the CFPB’s arguments that, under Dodd-Frank, a statute of limitations does not exist here, the Court ruled that the three-year statute of limitations that has traditionally applied to agency actions enforcing Section 8 of RESPA will continue to apply.13
The CFPB has suggested that it plans to appeal the panel’s decision, which could take the form of either a petition for rehearing en banc in the D.C. Circuit or an appeal to the Supreme Court. Assuming it is upheld, this ruling will have several effects on the CFPB and the entities it oversees in the consumer finance marketplace.
Most notably, this ruling restricts the CFPB’s ability to retroactively apply new interpretations of settled law in enforcement actions. The ruling may impact the validity of past or pending CFPB enforcement actions, as the entities subject to such actions scrutinize the CFPB’s legal and regulatory interpretations. In particular, past or pending enforcement actions could be vulnerable on due process or statutory interpretation grounds. Regardless, the Court’s ruling should provide financial service companies, including mortgage lenders, with greater certainty when trying to align business practices with past statutory interpretations from government agencies.
The ruling also prevents the CFPB from ignoring statutes of limitations in those statutes that serve as the basis for administrative proceedings and enforcement actions. Again, this will provide financial service companies subject to enforcement actions with greater predictability in administrative proceedings.
Finally, the Court reinforced RESPA’s requirement that entities must not pay referral sources in excess of the reasonable value of the goods provided or services performed.